Investmemt Column: New chief cheers up Friends Provident
Balfour Beatty; Severn Trent
Wednesday 28 January 2009
Our view: Hold
Share price: 81.5p (+ 8.1p)
They waited a long time for him, but Trevor Matthews seems to be doing the business at Friends Provident. The Australian chief executive's garden got a six-month overhaul before his notice period with Standard Life expired in July, during which the insurer's business drifted amid confusion over strategy and takeover speculation. Most worryingly, the panels that recommend insurers for UK corporate pension business had dropped the company.
After six months, Mr Matthews has got to grips with the business, and yesterday reported that the British operation was "back in business", with 26 scheme wins in the final quarter of 2008. Friends also unveiled a solid sales performance for the year and gave reassurance on its capital position and dividend, sending the shares up 11 per cent to 81p. Total new business fell 11 per cent to £1bn, but came in ahead of analysts' consensus of £924m, driven by healthy sales in the international business and better-than-forecast performance at Lombard, the wealth management division.
Mr Matthews said the capital surplus was £850m, and could withstand a further 30 per cent fall in equity markets from 31 December with no material impact. If corporate bond spreads widened by 150 basis points, the maximum damage to the surplus would be £100m.
With concerns about dividend cuts hanging over the sector, Friends said it saw no reason to mull a reduction in the payout, which yields a solid 5 per cent.
After a turbulent 2008, Friends has steadied the ship and come up with a couple of nice surprises for investors. But choppy waters still lie ahead, with the group heavily geared to the UK's battered equities and housing markets (through sales of mortgage protection products).
Trading at just 0.55 per cent of Deutsche Bank analysts' embedded value calculation, the Friends turnaround story offers potential value in the medium term. There may even be a bid if JC Flowers, last year's stalker, or Sir Clive Cowdery's Resolution buy-up vehicle takes the bait. But for now we rate the shares a hold.
Our view: Buy
Share price: 345p (+3p)
More good news from Balfour Beatty. The company has won a £750m construction deal for the Heathrow East project, which includes realigning taxi-ways, building new aircraft bays, and work on transport links to other terminals. It has also signed a 10-year framework deal to help with BAA's £6.6bn capital programme.
The win comes hot on the heels of a positive trading update for the year to December. Despite grim conditions, Balfour's balance sheet is strong, including £250m of cash, and the confirmed order book is up from the £12.1bn reported at the half year. Strong reliance on the public sector (which represents 76 per cent of the business) provides a solid order book, and the group is well positioned to reap the rewards of boosted public investment plans.
A potential role in the UK's multibillion-pound nuclear renaissance is also a good bet. Balfour has already teamed up with Rolls-Royce and Areva to develop the skills and supply chain to build the French company's next-generation nuclear reactor, the first of which could start construction in 2013.
From more than 400p in August, the share price dropped to as little as 224p in October as the bottom fell out of the stock market. Now back up around the 340p mark, Balfour is already rebalancing its value. Now is the time to buy.
Our view: Tentative hold
Share price: 1146p (–41p)
The pesky recession is making itself felt everywhere. Severn Trent has warned that lower water consumption among its metered industrial customers could take up to £25m off revenues over the current financial year, some £10m more than previously forecast.
Last year was a tricky one for Severn Trent. Fined a record £35.8m by Ofwat, the water regulator, in April for overcharging customers on the basis of misleading performance figures, the company only started to put the debacle behind it with interim financial results in November well in line with forecasts and showing pre-tax profits up by nearly 5 per cent and the dividend boosted by 8 per cent.
The latest news is a blow to confidence in both the company and the sector as a whole. Although Severn's other, non-metered, trading has been in line with expectations, as are both operating and capital expenditure, the dip in metered usage suggests the water industry may be less resilient to economic difficulties than had been hoped. And while Severn's £30m cost saving programme is still expected to conclude as planned over this year and next, and expenditure has been "reprioritised" down by £20m to a range of £650m to £670m, the effect of falling consumption on confidence should not be overlooked. Severn is a tentative hold.
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